8.75% From Lehigh Gas Partners

Lehigh Gas Partners LPLehigh Gas Partners LP (LGP) announced pricing terms for its upcoming IPO. It expects to sell 6 million common units at a price range of $19 to $21. The underwriters will be granted a 30-day option to purchase up to an additional 900,000 common units.

 

Business

Lehigh does exactly what Susser Petroleum (SUSP) does. (See our article here.) They generate income from “the wholesale distribution of motor fuels primarily by charging a per gallon margin that is either a fixed mark-up per gallon or a variable rate mark-up per gallon.” They also own and rent out gas stations. As of June 30, 2012, it owned 182 sites.

Spin-off

Lehigh Gas Partners Ownership

Details of the spin-off:

  • 6 million common units are offered at the price range of $19-$21 or 6.9 million common units if the underwriters exercise their option to purchase additional common units in full.
  • If the underwriters don’t exercise the option, the .9 million additional units will go to the Topper Group.
  • Regardless of what happens with the underwriters, there will be “7,525,000 common units representing a 50.0% limited partner interest in us and 7,525,000 subordinated units representing a 50.0% limited partner interest in us.”

Cash Distribution

The common units and subordinated units differ on the priority of receiving dividends. The partnership will distribute cash each quarter in the following manner:
  • first, to the holders of common units, until each common unit has received a minimum quarterly distribution of $0.4375 plus any arrearages from prior quarters;”
  • second, to the holders of subordinated units, until each subordinated unit has received a minimum quarterly distribution of $0.4375; and”
  • third, to all unitholders, pro rata, until each unit has received a distribution of $0.5031.”

“If cash distributions to our unitholders exceed $0.5031 per unit in any quarter, our unitholders and our general partner will receive distributions according to the following percentage allocations:”

  • above $0.5031 up to $0.5469 – 85% unit holders, 15% general partner
  • above $0.5469 up to $0.6563 – 75% unit holders, 25% general partner
  • above $0.6563 – 50% unit holders, 50% general partner

Conversion of subordinated units

“The subordination period will end on the first business day after we have earned and paid at least:

  1. $1.75 (the minimum quarterly distribution on an annualized basis) on each outstanding common unit and subordinated unit for each of three consecutive, non-overlapping four quarter periods ending on or after December 31, 2015 or 
  2. $2.6250 (150.0% of the annualized minimum quarterly distribution) on each outstanding common unit and subordinated unit and the related distribution on the incentive distribution rights for a four-quarter period ending on or after December 31, 2013, in each case provided there are no arrearages on our common units at that time.

When the subordination period ends, all subordinated units will convert into common units on a one-for-one basis, and all common units thereafter will no longer be entitled to arrearages.”

 Analysis

This IPO is an exact copy of the Susser Petroleum IPO. The fact that Susser is now trading at $25 should be an indication that this IPO will price at high end of range and it will pop during trading. At $20/share and $1.75 dividend, the yield will be 8.75%. At $21/share, it will be $8.3%. The dividend should be very safe because common units have rights over subordinated units.

Based on their 2013 projections, the dividend could go above $1.75. Couple things that concerned me in the filing:

  • Based on their 2013 projections, their rental income is negative (free cash flow is positive because of depreciation).
  • LGO, an entity managed by Joseph V. Topper, Jr, the Chief Executive Officer and the Chairman of the board of directors of our general partner, is leasing or sub-leasing 182 sites from the company at an aggregate initial annual rent of 3.8 million. That is $20,0000 per site. This seems really low because each site is worth around $1 million. Yearly maintenance for each site is probably around $20,000.
Either way, I expect this to trade similar to SUSP, around $25/share. Especially, since the SeaDrill Partners IPO priced at the high end of range at $22.